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Abstract

This study tests the Miller (1977) hypothesis as an explanation for stock price behavior
around technology firms’ earnings announcements during the late 1990s. Specifically, we
examine whether the anomalous tendency for stock prices to increase (decrease) before
(after) earnings announcements during this period is associated with an increase (decrease) in
investor disagreement before (after) the announcement. For a sample of high-tech stocks in
1998, we use the daily number of messages posted on a firm’s Internet message board (chat
room) as a measure of the level of investor disagreement about the firm’s prospects.
Consistent with Miller, we find that stocks with a larger increase in the level of disagreement
before the announcement tend to have a larger pre-announcement price increase, and a larger
price reversal after the earnings announcement. We also find that both small and large
investors buy before the announcement and sell afterward, although large investors begin
selling sooner than retail investors. In addition, we find our disagreement measure is directly
related to net initiated order flow from retail investors, but not institutional investors. Finally,
we find that the relative amount of retail versus institutional trading in a stock is positively
related to the pre-announcement price runup and negatively related to the post-announcement
reversal, and that disagreement is significantly associated with these return patterns only for
the subsample of stocks with the highest proportion of retail trading. These results are
consistent with the view that retail investors are less willing or less able to (short) sell than
institutional investors, and they suggest the Miller hypothesis applies more to retail investors
than to institutional investors in this setting.